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Sharing as Risk Pooling in a Social Dilemma Experiment

  • Todd Cherry

    ()

    (Department of Economics, Appalachian State University)

  • E. Lance Howe

    ()

    (Department of Economics, University of Alaska Anchorage)

  • James J. Murphy

    ()

    (Department of Economics, University of Alaska Anchorage)

In rural economies with missing or incomplete markets, idiosyncratic risk is frequently pooled through informal networks. Idiosyncratic shocks, however, are not limited to private goods but can also restrict an individual from partaking in or benefitting from a collective activity. In these situations, a group must decide whether to provide insurance to the affected member. In this paper, we describe results of a laboratory experiment designed to test whether a simple sharing institution can sustain risk pooling in a social dilemma with idiosyncratic risk. We test whether risk can be pooled without a commitment device and, separately, whether effective risk pooling induces greater cooperation in the social dilemma. We find that even in the absence of a commitment device or reputational considerations, subjects voluntarily pool risk thereby reducing variance in individual earnings. In spite of effective risk pooling, however, cooperation in the social dilemma is unaffected.

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File URL: http://www.econpapers.uaa.alaska.edu/RePEC/ala/wpaper/ALA201201.pdf
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Paper provided by University of Alaska Anchorage, Department of Economics in its series Working Papers with number 2012-01.

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Date of creation: Apr 2012
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Handle: RePEc:ala:wpaper:2012-01
Contact details of provider: Web page: http://www.cbpp.uaa.alaska.edu/CBPPHome/DepartmentsandMajors/Economics.aspx

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